SECURITIES CLASS ACTIONS IN CANADA: AN OPPORTUNITY TO REDUCE RISK FOR DIRECTORS AND OFFICERS

In Canada, securities legislation permits purchasers of securities in the secondary market to bring class action lawsuits against public companies, their directors and officers and others for alleged misrepresentations in financial statements and other public disclosure. Investors can do so without proving that they relied on the misrepresentation in making their investment decisions. However, as a result of a unique statutory safeguard in Canada designed to prevent unmeritorious lawsuits, investors must first obtain leave from the court to pursue their claims by demonstrating that: (i) their claims are brought in good faith; and (ii) there is a reasonable possibility that they will succeed at trial.

In addition to the leave requirement, various statutory defences are available to directors and officers, including the ‘reasonable investigation’ defence. That defence permits the defendant to prove that: (i) before the release of the public disclosure containing the alleged misrepresentation, he or she conducted a reasonable investigation; and (ii) at the time of the release of the public disclosure, he or she had no reasonable grounds to believe that the document contained the alleged misrepresentation. To date, there have been a relatively limited number of cases where the courts have considered this defence at the preliminary leave stage. However, those cases suggest that directors and officers will be held to a high standard. They must show that they took diligent steps to ensure the accuracy of the company’s statements before their disclosure to the public. The question is: what must a director or officer do to successfully invoke the reasonable investigation defence and defeat a class action at the initial stages of litigation?